As mortgages plummet, how to swing a refi?

3 min readMay. 10, 2012

Advertiser Disclosure

We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free - so that you can make financial decisions with confidence. Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover.

How We Make Money.

The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you.

At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here’s an explanation for .

Editorial Integrity

Bankrate follows a strict editorial policy, so you can trust that we’re putting your interests first. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions.

Key Principles

We value your trust. Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens. Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate. We maintain a firewall between our advertisers and our editorial team. Our editorial team does not receive direct compensation from our advertisers.

Editorial Independence

Bankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information.

How We Make Money

You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey.

Bankrate follows a strict editorial policy, so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers.

We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money.

Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service.

Share

As mortgage rates hit another record low, some homeowners ponder whether it’s worth reaching into their savings to buy their way into the refinance craze. Others have the privilege of cashing out and reinvesting the money.

30 year fixed rate mortgage – 3 month trend

The benchmark 30-year fixed-rate mortgage fell to 4.02 percent, compared to 4.05 percent the previous week, according to the Bankrate.com national survey of large lenders. The mortgages in this week’s survey had an average total of 0.43 discount and origination points. One year ago, the mortgage index was 4.82 percent; four weeks ago, it was 4.11 percent.

Whether cashing in or cashing out, refinancers are trying to figure out the best strategy to make the most out of these low rates, says David Kuiper, a mortgage planner at First Place Bank in Holland, Mich.

A cash-in refinance is for borrowers who have little to no equity. They bring money to table to reduce their loan balances so they can refinance.

In a cash-out refinance, the homeowner has equity and can borrow more than what is currently owed.

Paying to refinance

Because of declining home values, many homeowners are asked to pay some money upfront to grab today’s low rates. The majority of homeowners can’t afford to do so. But those who can often see the opportunity as an investment that will pay off in a few years, Kuiper explains.

He says he recently worked with a couple who wanted to refinance a mortgage of $560,000 that carried an interest rate of 6.5 percent. To refinance into a 15-year loan at 2.99 percent, the borrowers had to spend $37,000 to pay down the mortgage balance.

“They happened to have it sitting idle in a checking account,” Kuiper says. The refinance will save the borrowers $14,000 a year in interest. “That alone is a 38 percent return on their cash. They were not earning 38 percent on their checking account.”

Cash-in refinances reached their peak in the second half of 2011. Nearly 1 in 2 homeowners who refinanced a mortgage was willing to do a cash-in refinance in the last quarter of 2011, according to a Freddie Mac report.

In the first three months of this year, only 1 in 5 borrowers reduced their mortgage balances when refinancing, the report shows.

More On Mortgages:

That’s partly because an increasing number of underwater borrowers have been given access to refinances through the Home Affordable Refinance Program, says Dan Green, a loan officer at Watersone Mortgage in Cincinnati. HARP allows borrowers to refinance regardless of how deeply underwater they are.

Is it worth paying thousands for a lower rate?

But not every homeowner qualifies for HARP. Those who can’t refinance through HARP are left with a decision: Pay down the mortgage, or keep the high interest rate they currently have on their loans.

Usually, borrowers choose to wait it out, hoping their homes will appraise for a higher value soon, says Rob Nunziata, president of FBC Mortgage in Orlando, Fla.

“Refinancing isn’t a necessity,” Nunziata says. “If people have to spend money to refinance, many of them just won’t do it.”

But it’s worth crunching the numbers and figuring out how long it will take to recoup the money invested, experts say. It’s also important to consider how long you plan to keep the house.

“Every situation is unique,” Green says. “There are cases where it makes sense and cases where it doesn’t. That’s a question you need to discuss with your loan officer.”

The lucky ones get to cash out

The low rates also attract property owners who have equity and want to refinance, cash out and reinvest.

Kuiper says he recently worked with a client who refinanced the equity on a rental property to buy another investment home. Green says one of his clients cashed out on a refinance to pay for construction and renovations.

“You’d think this is a great time to cash out with rates being so low,” Nunziata says.

But qualifying for a cash-out refinance can be a challenge, he says.

“The guidelines on cash-out refis are much stricter than on a regular refinance,” he says. And the interest rate is a little higher.

About 21 percent of borrowers who refinanced in the first quarter of this year got back some cash, according to Freddie Mac. At the height of the market in 2006, when it didn’t take much more than a pulse to get a mortgage, about 88 percent of borrowers cashed out when they refinanced, the report shows.

“Consumers and the market in general are much more conservative these days,” Nunziata says.

About the author

Polyana da Costa, former mortgage analyst/reporter for Bankrate, holds a bachelor's degree in journalism from San Francisco State University with a minor in international relations.
Polyana was a real estate reporter at the Daily Business Review for about five years. While at the Review, she covered the crash of the housing market and an array of issues related to the foreclosure crisis.
Polyana also has worked as a business writer for the Pensacola News Journal, where she covered personal finance and small businesses. Before her move to Florida, she held an internship at KGO-TV, an ABC-owned television station in San Francisco. She also interned as a reporter for the Statesman Journal of Salem, Ore.
Polyana has been recognized with numerous journalism awards, including the National Association of Real Estate Editors' James D. Carper Award in 2009, for best entry by a young Journalist.
She also won two other NAREE awards for her commercial real estate and finance/mortgage coverage; two Green Eyeshade Awards; and two Sunshine State Awards from the Society of Professional Journalists, including best real estate reporting in 2009.
Polyana speaks fluent Portuguese and Spanish.